The euro edged higher against a basket of major global currencies during European trading on Tuesday, attempting to recover from a two-week low against the US dollar and heading for its first daily gain in three sessions, supported by a pause in the dollar's recent rally ahead of the release of key US inflation data for June.

As global oil prices continue to surge, inflationary pressures are mounting on European Central Bank policymakers, reinforcing expectations that the ECB could raise interest rates at its September meeting.

The Price

• The euro rose around 0.15% against the US dollar to $1.1397, after opening at $1.1382 and touching an intraday low of $1.1378.

• The euro closed Monday down 0.3% against the dollar, marking its second consecutive daily loss and falling to a two-week low of $1.1377 as renewed military tensions between the United States and Iran boosted demand for the greenback.

US dollar

The US Dollar Index slipped more than 0.1% on Tuesday, pulling back from a two-week high of 101.33 as the greenback paused its advance against a basket of global currencies.

Alongside profit-taking, investors have refrained from adding fresh long-dollar positions ahead of the release of June's US inflation data, which is expected to provide crucial clues about whether the Federal Reserve will raise interest rates later this year.

Federal Reserve Governor Christopher Waller said on Monday that the US central bank may need to raise interest rates "in the near term" if upcoming data shows inflation remains well above the Fed's 2% target.

Global oil prices

Oil prices climbed more than 2% on Tuesday, extending gains for a second consecutive session to their highest level in a month as military exchanges between the United States and Iran continued around the Strait of Hormuz.

The continued surge in oil prices has revived fears of accelerating inflation, increasing the likelihood that major central banks could raise interest rates in the near future, marking a sharp reversal from pre-war expectations for rate cuts or an extended pause in monetary tightening.

Latest developments in the Iran conflict

• US forces carried out an intensive five-hour bombing campaign targeting Revolutionary Guard military positions in several Iranian cities.

• President Donald Trump proposed imposing a 20% tariff on goods passing through the Strait of Hormuz and reinstated the naval blockade on Iran.

• CENTCOM officially announced that it will resume enforcing the naval blockade on vessels traveling to and from Iranian ports beginning at 4:00 p.m. US Eastern Time on Tuesday.

• Iran's Revolutionary Guard announced additional missile and drone attacks on US bases in several Gulf countries, while also targeting oil tankers attempting to transit the Strait of Hormuz.

European interest rates

• Amid the rally in global oil prices, money markets have raised the probability of a 25-basis-point European Central Bank rate hike in July to above 35%.

• Markets are now pricing the probability of a 25-basis-point ECB rate increase at the September meeting above 95%.

• Investors are awaiting additional eurozone data on inflation, employment, and wage growth to reassess expectations for the ECB's policy path.

The Japanese yen strengthened against a basket of major and minor currencies during Asian trading on Tuesday and was on track to post its third gain in the past four sessions against the US dollar, benefiting from a pause in the dollar's recent rally ahead of the release of key US inflation data for June.

Global oil prices continued to surge as military exchanges between the United States and Iran intensified around the Strait of Hormuz, reviving concerns over mounting inflationary pressures on central banks and reinforcing expectations that interest rates will remain elevated or that additional monetary tightening could be required in the near term.

The Price

• The US dollar fell around 0.15% against the yen to ¥162.22, after opening at ¥162.43 and reaching an intraday high of ¥162.47.

• The yen ended Monday down 0.5% against the dollar, marking its first daily loss in the previous three sessions, as renewed tensions surrounding the Strait of Hormuz boosted demand for the US currency.

US dollar

The US Dollar Index fell more than 0.1% on Tuesday, retreating from a two-week high of 101.33 as the greenback paused its advance against a basket of global currencies.

In addition to profit-taking, investors refrained from building fresh long-dollar positions ahead of the release of June's US inflation data, which is expected to provide crucial guidance on whether the Federal Reserve will raise interest rates later this year.

Federal Reserve Governor Christopher Waller said on Monday that the US central bank may need to raise interest rates "in the near term" if upcoming data shows inflation remains well above the Fed's 2% target.

Global oil prices

Oil prices climbed more than 2% on Tuesday, extending gains for a second consecutive session and reaching their highest level in a month as military strikes between the United States and Iran continued around the Strait of Hormuz.

The sustained rally in oil prices has renewed fears of accelerating inflation, increasing the likelihood that central banks may raise interest rates in the near future, marking a sharp reversal from pre-war expectations for rate cuts or an extended pause in policy tightening.

Latest developments in the Iran conflict

• US forces carried out an intensive five-hour bombing campaign targeting Revolutionary Guard military positions in several Iranian cities.

• President Donald Trump proposed imposing a 20% tariff on goods passing through the Strait of Hormuz and reinstated the naval blockade on Iran.

• CENTCOM officially announced that it will resume enforcing the naval blockade on vessels traveling to and from Iranian ports beginning at 4:00 p.m. US Eastern Time on Tuesday.

• Iran's Revolutionary Guard announced additional missile and drone attacks on US bases in several Gulf countries, while also targeting oil tankers attempting to transit the Strait of Hormuz.

Japanese interest rates

• Amid rising global oil prices, markets have increased the probability of a 25-basis-point rate hike by the Bank of Japan to above 30%.

• The probability of a quarter-point rate increase at the Bank of Japan's October meeting has climbed above 85%.

• Investors are now awaiting additional Japanese data on inflation, employment, and wage growth to reassess the outlook for Bank of Japan policy.

Oil prices soared more than 9% on Monday after US President Donald Trump announced the reinstatement of a naval blockade on Iran, as the military confrontation between Washington and Tehran over control of the Strait of Hormuz intensified, raising fresh concerns about global energy supplies.

Global benchmark Brent crude jumped 9.6% to settle at $83.30 a barrel, while US West Texas Intermediate (WTI) crude climbed 9.4% to close at $78.14 a barrel.

In a post on his social media platform, Trump said the United States was "reimposing the Iranian blockade," adding that the measure "targets only Iranian vessels and those doing business with them, while all other nations will continue to enjoy free passage through the Strait of Hormuz."

He also said the United States would guarantee safe navigation through the strait but would charge a fee equivalent to 20% of the value of all shipments passing through the waterway in return for providing security.

Military escalation intensifies

The announcement followed a fresh exchange of military strikes between the United States and Iran over the weekend.

US Central Command (CENTCOM) said it launched a new wave of airstrikes on targets inside Iran on Sunday after striking 140 targets on Saturday in response to an attack by Iran's Revolutionary Guard on a container ship transiting the Strait of Hormuz.

In response, Iran's Tasnim News Agency reported that Tehran had targeted US military facilities in Jordan, Kuwait, Bahrain, and Oman.

Iranian state media also announced the closure of the Strait of Hormuz "until further notice," although the US military denied the claim, insisting that the waterway remains open to all vessels operating legally.

CENTCOM said its forces "remain prepared to guarantee freedom of navigation despite Iranian threats," adding that "Iran does not control the strait, and maritime traffic continues."

Security risks remain elevated

Trump also reiterated in an interview with NBC's Meet the Press that the Strait of Hormuz remains open.

Data from maritime intelligence firm Windward showed that nine vessels transited the strait on Saturday.

Meanwhile, the Joint Maritime Information Center (JMIC), a US-led maritime coalition based in Bahrain, confirmed that the southern shipping lane through Omani waters remains open for both inbound and outbound traffic.

However, the center warned that the security situation in the strait remains highly dangerous and urged vessels to exercise "the highest level of caution."

Background to the crisis

The latest strikes marked the fourth wave of US attacks on Iran within a week in response to repeated attacks on commercial vessels in the Strait of Hormuz.

Iran has demanded that ships use the northern shipping lane within its territorial waters, arguing that it has the right to regulate traffic through the strait, while the United States maintains that international shipping must continue without restrictions.

The current escalation stems from disagreements between Washington and Tehran over the mechanism for reopening the Strait of Hormuz under a temporary ceasefire agreement signed on June 17.

Before the conflict erupted, the Strait of Hormuz handled around 20% of global oil supplies. Shipping traffic declined sharply after attacks on commercial vessels began in early March before partially recovering following the temporary agreement between the two sides.

Gold prices dropped about 3% on Monday after US President Donald Trump announced the reinstatement of a naval blockade on Iran, driving oil prices higher, reviving inflation concerns, and reinforcing expectations that US interest rates will remain elevated for longer.

Spot gold fell 3.1% to $3,991.56 an ounce, extending losses for a second consecutive session.

US gold futures also declined 2.6% to settle at $4,005.70 an ounce.

Fawad Razaqzada, Market Analyst at Forex.com, said rising oil prices driven by Middle East tensions increase the likelihood of further monetary tightening by the Federal Reserve, creating a negative backdrop for non-yielding assets such as gold.

He added that if oil prices continue to climb, gold could break below key support levels, initially targeting $3,800 an ounce and potentially falling toward $3,500 if selling pressure accelerates.

Higher oil prices fuel rate hike expectations

Earlier on Monday, President Donald Trump announced that the United States would reimpose a naval blockade on Iran and collect 20% of the value of all shipments passing through the Strait of Hormuz after Tehran declared the closure of the strategic waterway, sending oil prices up about 5%.

Higher oil prices increase inflationary pressures by raising energy and transportation costs, potentially forcing central banks to keep interest rates higher for longer or even raise them again to contain price pressures.

According to CME Group's FedWatch tool, markets are now pricing a 71% probability that the Federal Reserve will raise interest rates at its September meeting.

Investors are also awaiting Federal Reserve Chair Kevin Warsh's first congressional testimony on monetary policy this week for fresh signals on the future path of interest rates.

Markets will also closely watch a series of key US economic releases, including the Consumer Price Index (CPI), Producer Price Index (PPI), June retail sales, and weekly jobless claims, all of which could influence the Federal Reserve's policy outlook in the months ahead.